Pound to Dollar Week Ahead Forecast: Washington and London Drama

November 3, 2024 - Written by Frank Davies

STORY LINK Pound to Dollar Week Ahead Forecast: Washington and London Drama

UBS expects the Pound to Dollar (GBP/USD) exchange rate to strengthen to 1.38 by June 2025.

During the week, GBP/USD dipped to 10-week lows just below 1.2850 following the UK budget before a recovery to 1.2960.

Markets expect a Trump victory would provide initial dollar support with a softer tone in Harris wins.

Chancellor Reeves announced a £40bn tax-raising package in the budget.

Spending levels were also increased sharply and, despite tax hikes, borrowing levels were project to be £32bn higher each year.

Deficit forecasts undermined the bond markets with a jump in yields to 12-month highs which unsettled the Pound.

Markets were still confident that there would be a Bank of England rate cut this week, but there was a greater element of uncertainty.

BMO Bank commented; "Considering the composition of the MPC, and the effect the budget measures will have on the BoE projections and on inflation persistence, we think at least 5 may well vote for an unchanged Bank Rate."

Traders also pared expectations of a further rate cut in December.

With the Federal Reserve in the blackout period attention focussed on the US election for much of the time.

The dollar did, however, dip after a weaker than expected employment report with non-farm payrolls growth held to 12,000 for October.

Stikes and hurricanes did have an impact with the unemployment rate unchanged at 4.1%.

Markets overall remained very confident that the Fed would cut interest rates by a further 25 basis points at this week’s policy meeting.

As far as the election is concerned, there was still a high degree of uncertainty, but markets were tending to bet on a Trump victory.

Alex Cohen, FX strategist at Bank of America commented; “We're seeing risks to the dollar as asymmetric to the upside in case of a Trump victory and a bit more status quo, slightly maybe to the downside, in a Harris victory."

According to Cohen; "That's mainly due to trade and tariff policy in a Trump administration that could have a disproportionate impact on the dollar, pushing it higher both from expected inflation as well as from a trade perspective."

He added; "Our medium-term view of the dollar is it should ultimately trade negative in a soft landing environment. But given how strong U.S. data has been recently, there are definite additional upside risks to that forecast."

Although UBS also noted upside dollar risks, it is sceptical over medium-term gains.

According to the bank; “Further USD gains could be the initial market reaction if Trump wins, based on the US-China trade war experience. But compared to 2018, the Fed is cutting (not hiking), US growth is slowing (not accelerating), and USD valuations are stretched.”

It added; “Our analysis shows that US tariffs are likely to hurt the US consumer and the US economy more than the rest of the world, likely leading to a weaker USD over the medium term in both scenarios.”

HSBC expects yields will favour the dollar over the Pound; “If either the Republicans or Democrats win the elections, the US deficit is expected to remain higher than in the UK, providing greater support to the US economy, especially in the former case. This is likely to mean that the Fed stays tighter for longer than the Bank of England.”

It added; “Overall, we continue to expect GBP-USD to move lower towards 1.28 by year end.”

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TAGS: Pound Dollar Forecasts